Bitcoin Lawyer Introduction Thread

[Nesetalis]

very interesting thread :p subscribing as well.

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[njloof]

BTCLaw: any thoughts on how to avoid having Bitcoin suffer eGold's fate? Many of these online currency approaches fail for internal reasons (see: hashcash), but it looks like eGold became a victim of its success, particularly in its use for money laundering.

[xf2_org]

BTCLaw: any thoughts on how to avoid having Bitcoin suffer eGold's fate? Many of these online currency approaches fail for internal reasons (see: hashcash), but it looks like eGold became a victim of its success, particularly in its use for money laundering.

Sigh.  It is trivial to look up the details on e-gold.

e-gold failed for one very simple reason:  it did not register as an MSB, preferred a letter of the law approach ("gold is not money, therefore money regs do not apply") which convinced nobody.  Not e-gold users, not criminals, not regulators.

That's why bitcoin exchanges should pay attention to the MT laws of their country.

[jerfelix]

Sigh.  It is trivial to look up the details on e-gold.

e-gold failed for one very simple reason:  it did not register as an MSB, preferred a letter of the law approach ("gold is not money, therefore money regs do not apply") which convinced nobody.  Not e-gold users, not criminals, not regulators.

That's why bitcoin exchanges should pay attention to the MT laws of their country.

This worries me a bit, about Mt. Gox:
To meet the definition of an MSB, a person must conduct more than $1,000 in business with one person in one or more transactions (in one category of activity listed above) on any one day. A business is an MSB for each activity for which it meets this threshold. However, there is one exception. No activity threshold applies to the definition of money transmitter. A person that engages as a business in the transfer of funds is a money transmitter and an MSB, regardless of the amount of transfer activity.  (see http://www.fincen.gov/financial_institutions/msb/pdf/FinCENfactsheet.pdf )

I hope they are a registered MSB!

[xf2_org]

To meet the definition of an MSB, a person must conduct more than $1,000 in business with one person in one or more transactions (in one category of activity listed above) on any one day. A business is an MSB for each activity for which it meets this threshold. However, there is one exception. No activity threshold applies to the definition of money transmitter. A person that engages as a business in the transfer of funds is a money transmitter and an MSB, regardless of the amount of transfer activity.  (see http://www.fincen.gov/financial_institutions/msb/pdf/FinCENfactsheet.pdf )

Since bitcoins are "stored value" and not directly money, there is a FinCEN ruling that is relevant:
http://www.fincen.gov/statutes_regs/guidance/html/fin-2009-r001.html

[benjamindees]

You all should really be more careful making these sort of grandiose statements with regards to terms and laws you don't actually understand.

A Bitcoin doesn't represent any type of "stored value".  It isn't denominated in anything.  It's not a claim or a security.

And it's debatable whether more than a few Bitcoin-based businesses actually engage in "money services".

[xf2_org]

You all should really be more careful making these sort of grandiose statements with regards to terms and laws you don't actually understand.

No, that was advice given by US Department of Treasury.

Feel free to call them and complain about their grandiose statements... 

[benjamindees]

The US Treasury told you that Bitcoins are "stored value"?  Why the hell would you believe them?

[btclaw]

Are there any aspects of bitcoin that are illegal? I know this is broad question so maybe narrow it to things about running bitcoin client, accepting a bitcoin for something and someone not supplying the tangible good or service. Could you say sue someone for BitCoins or its equivalence in dollars? And if someone was to succesfully create a poisoned fork in the chain, is there any way to have them prosecuted or sued?

Many of the things you can DO with bitcoin are illegal.  As to whether or not it is illegal already, that is a tough question.  The U.S. Constitution is the supreme law of the land, above all other laws, so let's look at that, in relevant part:

http://caselaw.lp.findlaw.com/data/constitution/article01/37.html

I encourage members of the community to always refer to bitcoin as a "virtual good" or "virtual commodity" and NOT  "money", "currency", "tender", or "medium of exchange" etc.  As the federal government reserves the exclusive right "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures in the U.S. Constitution."  So, if the bitcoin open source project is coining money, it is illegal.  If it is merely producing a virtual good, it is not.

FRAUD, illegal under various criminal statutes == "accepting a bitcoin for something and someone not supplying the tangible good or service"

ATTACHMENT == "sue someone for BitCoins" - This is going to be a big issue outside the scope of this post.  Simple example:  Husband puts $10k into Bitcoin on mtgox, backs up wallet to flash drive and buries it in his mom's backyard, then divorces wife.  Wife finds out about the concealment.  Court orders husband to pay wife $10k.  Husband argues the bitcoins now worth only $5k or Wife argues now worth $20k or Husband denies existence.  Husband guilty of contempt of court <-- illegal.  See how this quickly gets outside the scope of this post?

Poisoned fork?  I know my bitcoin, but I'm not quite that advanced in my knowledge yet.

[btclaw]

For context, I'm in the UK, but I suspect the answer will apply regardless of the jurisdiction.

I'm of the understanding that if you buy BTC and then sell for profit at a later date, you're liable for Capital Gains Tax. But what's the tax situation if you're mining coins, and then selling them on your local exchange? My intuition is that it can't be CGT, because you didn't buy the coins in the first place - in the extreme case, you bought a mining rig, which was then used to produce coins, which you later sold. But I find it impossible to believe that you don't have to declare income gained like this. So what does it fall under?

Capital gains?  That is what happens when a person or company buys bitcoins, holds them for a while, then sells them at a profit.  Mining is different.

Coins are a virtual good that person or company is manufacturing as a miner.  This is business activity, which should be organized under a business entity, like and LLC or corporation.  Without such an entity set-up, most jurisdictions would be defaulted to a sole proprietorship.

Costs at least include electricity + hardware for mining.  Subtract the costs from the revenues to get profit.  Profits are taxed differently based on business structure and jurisdiction.  Business profits get taxed, but remember that money a person pays himself as an employee of his own business is salary, so that would be taxed as income.

[btclaw]

Welcome, Bitcoin Lawyer!

Let's give it a try...

in comments to this article  http://forums.theregister.co.uk/forum/1/2011/06/08/bitcoin_under_attack/ someone said:

My reading of the law is that bitcoins are already illegal, and it is primarily the miners that are breaking the law by not registering as electronic money issuers, not keeping appropriate reserves to cover redemptions of their magic numbers, not employing "fit and proper persons", not having complaints procedures and so on.

your opinion?

Bitcoin is a virtual good, not money.  Bitcoin resembles money less than Linden dollars or WoW gold, neither of which is illegal.  Community, Go set them straight if you can.  

A big drawback to our public image is the sheer volume of published information online calling it a "crypto-currency".  That sounds like money.  It sounds cool and subversive, but the record should be set straight.  If you're not a computer geek and a libertarian, "crypto-currency" is a frightening and unfamiliar term.  

Use a comparison to other encrypted virtual goods kept secure by a single entity, like linden dollars, WoW gold, etc.  The only difference with bitcoin is the security of public key cryptography and open-source p2p with distributed ownership.  Otherwise, it is little different from other assets that only exist electronically.

[btclaw]

Thanks for joining us Bitcoin Lawyer. I'm sure you'll be able to make a very valuable contribution to this place.

I'm an aussie and I'm also interested in the tax and liability issues surounding trade and consumer protection.

 What's the bet they try to disown it as a responsibility, while still demanding that tax be paid on its revinues.  Interesting time ahead.

Again, welcome to the club btclaw. 

Thanks for the welcome!  I'm trying to respond to everyone as quickly as I can. 

I see from your post that you have read some of the mis-information posted about bitcoin that it is a currency and therefore distinguishable from many other forms of electronically maintained virtual asset.  It isn't and it is not.  Google "second life lawsuit".

Under common law, Contract law does not distinguish between valuable forms of consideration.  Bitcoins have value, so they can be used as consideration in forming a contract.  You should have no trouble finding a Court to file a lawsuit over contract breach where the consideration for the contract was bitcoins any more than if it was your grandfather's pocketwatch.
http://en.wikipedia.org/wiki/Contract#Common_law

[btclaw]

BTCLaw: any thoughts on how to avoid having Bitcoin suffer eGold's fate? Many of these online currency approaches fail for internal reasons (see: hashcash), but it looks like eGold became a victim of its success, particularly in its use for money laundering.

First let me say I'm biased, as I would love to be involved as a principal in any serious, well-funded effort to create a legitimate money service business and/or bank startup to exchange bitcoins for currency.

Yes, we need more exchanges.  We need at least one exchange built on a rock-solid foundation of strict legal compliance.  Run like any other financial institution.  No dirty business.  No dirty money.  A full-time legal compliance staff. This means at least one person in  who can act as a legal liaison to contracted legal counsel and later head of legal compliance.

The federal prosecutors got e-gold by going after the exchanges, which were not compliant with applicable Banking Secrecy laws.  People were using the exchanges to get clean cash from criminal enterprises, and not only did they fail to stop it or discourage it adequately, but they seemed to be entirely aware of it, even encouraging it.  In otherwords, e-gold's central depository and its unaffiliated exchanges were knowingly and intentionally operating as a money laundering business.

Mtgox is great for being the first.  We are where we are because of him and his company.  He is taking a great risk.  I mean, it was just months ago that he put a post up on this forum announcing his exchange is open for business, and now they have volume of $1million per day.  I'm sure it is overwhelming and I wish Mtgox and his company all the best.

But for mtgox to stand the test of time, they need to stand up to the pressure of rapid expansion, especially on the legal end, and start forming major formal relationships with banking institutions, currency exchanges, and at least one good international law firm.  The future of bitcoin should not rest on mtgox's shoulder's, the burden is heavy enough as it is.

From the wikipedia article on e-gold, but consistent with news reports I remember reading at the time:
"The essence of the allegations in the indictment is twofold: (1) e-gold is an unlicensed money transmitting entity as defined by United States Code;[16] and (2) e-gold was a de facto means of moving money from illegal activities to wit: high-yield investment programs which are Ponzi scams, credit card and identity fraud sites and retailers of child pornography.
The indictment alleges that the defendants knew of illegal activity associated with accounts and recorded it in the e-gold database with notations such as "child porn", "scammer", and "CC fraud".[17] Additionally, it alleges that while e-gold placed "value limits" on certain accounts suspected of criminal activity, they suggested that the owner open a new account, placing no restrictions on their ability to move funds out of the original account.[18]"

[JCD3nton]

I am also a lawyer and I can't even count the number of ethical violations in this thread. You should be ashamed of yourself and are at high risk of disciplinary sanctions or disbarment. To add to that, as a criminal lawyer, you aren't competent to comment on these issues.

[btclaw]

To meet the definition of an MSB, a person must conduct more than $1,000 in business with one person in one or more transactions (in one category of activity listed above) on any one day. A business is an MSB for each activity for which it meets this threshold. However, there is one exception. No activity threshold applies to the definition of money transmitter. A person that engages as a business in the transfer of funds is a money transmitter and an MSB, regardless of the amount of transfer activity.  (see http://www.fincen.gov/financial_institutions/msb/pdf/FinCENfactsheet.pdf )

Since bitcoins are "stored value" and not directly money, there is a FinCEN ruling that is relevant:
http://www.fincen.gov/statutes_regs/guidance/html/fin-2009-r001.html

Read the ruling to mean this:  A company "ABC" could be created that acts as a "merchant payment processor".  ABC sells point-of-sale terminals that connect to ABC's servers to process pre-paid bitcoin cards.  ABC does not convert currency into bitcoins, because if it did then it would be a money service business or money transmitter.

Then, when the cards are used it works like this:

Merchants [M1, M2 ... Mn] give payment instructions to ABC (pay Mx X bitcoin for goods or or services sold on <date> at <terminal location> ; <transaction ID>)

ABC submits payment instructions to BitBank for backoffice processing (remit X bitcoins to ABC re: <transaction ID>).
ABC receives bitcoins from BitBank and remits them to Merchants (remit X bitcoins to Mx re: <transaction ID>).

ABC collects fees from Merchants for providing this service.

ABC is not a MSB or MT.

I'm open to argument on this reading.

As an aside, bitbank.com btcbank.com and bitcoinbank.com are all already registered to 3 different entities.

PHEW all caught up on this thread.

[btclaw]

I am also a lawyer and I can't even count the number of ethical violations in this thread. You should be ashamed of yourself and are at high risk of disciplinary sanctions or disbarment. To add to that, as a criminal lawyer, you aren't competent to comment on these issues.

You're made me sweat for a minute there!  Just re-read ethical rules and tried my best to audit everything I have written on here.  Doing my best to make it clear that this is just an educational discussion.  I'm trying to BE educated about what legal issues there are surrounding bitcoin.  I'm trying to discuss an emerging area of law in a public forum.  I'm not a criminal and I'm not ashamed of trying to participate in an online discussion forum or blog.

Are you just trolling or was there a specific ethical violation you had in mind?  Please enlighten me, I'm trying my best to follow all my state's ethical rules regarding internet communication.

[Nesetalis]

btclaw, welcome to the forum, don't mind the trolls, they grow on trees. But if he is right, i hope he has the decency to point out where and how. ^.~ good luck

[Vladimir]

btclaw, welcome to bitcoin, though, it is not such an easy ride apparently... underwater trolls abound...

[twobitcoins]

Capital gains?  That is what happens when a person or company buys bitcoins, holds them for a while, then sells them at a profit.  Mining is different.

Coins are a virtual good that person or company is manufacturing as a miner.  This is business activity, which should be organized under a business entity, like and LLC or corporation.  Without such an entity set-up, most jurisdictions would be defaulted to a sole proprietorship.

Costs at least include electricity + hardware for mining.  Subtract the costs from the revenues to get profit.  Profits are taxed differently based on business structure and jurisdiction.  Business profits get taxed, but remember that money a person pays himself as an employee of his own business is salary, so that would be taxed as income.

Thanks for sharing this.  I'm no lawyer, but I've thought a lot about tax treatment of bitcoin mining and come to some different conclusions.  I'd love to hear your thoughts.

Assume we're talking about someone mining bitcoins directly (no pools, mining contracts, etc.).  Mined bitcoins come from two different sources: the block reward (currently 50 BTC) and transaction fees.

Transaction fees are not new bitcoins at all.  They were paid by someone performing a transaction and can be claimed by the miner who generates the block that includes that transaction.  I think you'd be hard pressed to say they were manufactured.  It seems more accurate to consider them as payment for the service of processing the transaction.  As such, I believe they would be taxable based on fair market value in the same way that a payment in USD for the same service would be taxed, and the FMV would become the cost basis.

The 50 BTC block reward is a different story.  They are newly issued coins, and it seems logical to consider them as having been manufactured, but even that does not seem 100% clear cut.  For example, I can easily change one line of code from 50 to 100 and let my computer look for blocks of 100 coins.  When it succeeds, I still won't end up with 100 coins because the rest of the network will reject it.  Or I could do all the correct work to generate 50 coins, but someone else finds a block at about the same time and the network chooses to accept that block and reject mine.  I think you could make the case that bitcoins are not being created by the efforts of the miners at all, but are being granted to the miners by the rest of the network as payment for doing computations that the network deems acceptable.  You might even say that all 21 million coins already exist, and they are just being distributed.  It's not physically possible to repeat the block solving work 1 million times and end up with 50 million coins, which would be the case with any normal manufacturing process.

The latter argument is much less clear than the transaction fees, but I've become somewhat convinced.  I'd love to hear your thoughts on both.

[bittersweet]

We need at least one exchange built on a rock-solid foundation of strict legal compliance.  Run like any other financial institution.  No dirty business.  No dirty money.  A full-time legal compliance staff. This means at least one person in  who can act as a legal liaison to contracted legal counsel and later head of legal compliance.

You are right. We need a front company to cover our non-legal businesses! Brilliant!!! I'm starting to like you, lawyer.